Jorgovanka Tabaković, Governor Of The National Bank Of Serbia

I’m extremely proud of the results we’ve achieved in preserving the exchange rate’s relative stability over the course of the last decade. That has provided our citizens and the economy with certitude, easier planning and more certainty in their business operations. The NBS has become a synonym for a safe haven and stability, an institution that carefully analyses and makes advanced preparations for periods of increased uncertainty

In all likelihood, we expect double-digit inflation by the end of this year. That’s why many eyes are turned towards the policy of the National Bank of Serbia. “Central banks use interest rates to impact inflation primarily through channels of demand and expectations, while monetary policy cannot impact on supply side pressures, or can only influence them to a small extent,” says National Bank of Serbia Governor Jorgovanka Tabaković.

Our interlocutor also notes that, given that economic activity was still recovering slowly from the pandemic when inflation began to rise in many countries, there was a fear that tightening monetary policy would cause that recovery to slow further. Care is still being taken when it comes to this. Additionally, Tabaković considers, it needs to be kept in mind that monetary policy has a delayed impact on inflation, which makes it important to project future inflation as accurately as possible. “In a situation in which pricing trends are largely determined by the outcome of military conflicts, projections can deviate greatly from expectations, which actually happened during the previous period. We certainly have room to continue raising the reference interest rate if the need arises, but also to use other instruments in order to tighten monetary conditions. However, we also take the aforementioned limitations into consideration when deciding on monetary policy.”

To what extent does this new situation require that you, at the NBS, transition to new approaches in terms of data analysis, monetary policy management and banking sector oversight?

The NBS has become a synonym for a safe haven and stability, an institution that conducts careful analysis and advanced preparations for periods of increased uncertainty. Together with the President (formerly the Prime Minister) and the Government, we work constantly to strengthen the resilience of the economic and financial system. I’m extremely proud of the results we’ve achieved in preserving the exchange rate’s relative stability over the course of the last decade.

Regardless of the challenges to date, banking sector stability hasn’t been threatened for an instant… The results achieved to date instil confidence in our banking sector remaining a factor of stability and support for the economy and citizens

That has provided our citizens and the economy with certitude, easier planning and more certainty in their business operations. We strive to improve our work constantly, by monitoring trends, but also by being a role model for others, because – without false modesty – we lead the way in many areas compared to other central banks. I’m very proud of that, as it is a result of our dedicated work and openness to constant improvement. Thus, the NBS has developed a system of data analytics over the years that enables it to gain detailed insight into factors that impact on the exchange rate, and which is amended and upgraded as required, just as the banking system itself and the financial market undergo changes. At the same time, we continuously monitor the development of, and apply, the best international practice in the utilising of modern technologies and methodological approaches in controlling the operations of banks.

The arrangement with the IMF is unfolding favourably. How important was it for you to rely on consultations with the IMF in conducting monetary policy?

Consultations with the IMF are important, but we constantly stress the point that the NBS leads an independent monetary policy. During these consultations, we discuss macroeconomic and financial developments in the country, in which we always try to reach agreement, at least to the greatest extent possible. This, of course, doesn’t mean that we always have the same positions. The best example is our exchange rate policy. If you examine official reports and communications, you will see that the IMF has shifted its stance closer to the views of the NBS over the course of previous years when it comes to (not) allowing excessive short-term fluctuations in the exchange rate. I would, however, emphasise that the IMF, in its reports, also evaluates the monetary policy we’re implementing as being adequate.

We are again seeing talk, after a long time, about the level of external indebtedness, the coverage of imports by exports and countries’ external position. How does Serbia stand according to these parameters?

At the end of March 2022, Serbia’s external debt totalled 37.0 billion euros, or 67.5% of GDP, which is 8.6 percentage points lower than at the end of 2012. All indicators of the country’s external position have improved. From 2012 until the first quarter of 2022, the share of debt repayment in GDP fell from 12.3% to 9.4%, the share of external debt in the export of goods and services decreased from 223.6% to 121.3%, while the coverage of imports by exports of goods and services increased from 67.5% to 81.0%. And Serbia’s external debt risk has also reduced, thanks primarily to advanced repayments and the state’s hedging activities. The fact remains that we face an increased current account deficit in the balance of payments, but the same problems confronts all countries that are net importers of energy products, and that means the majority of countries.

The NBS cannot influence prices of industrial raw materials, oil, gas or other energy sources on the world market. And it is the rise of these prices specifically that’s the key reason for the increased current account deficit. There is nonetheless one part that we can influence: preserving exchange rate stability. The exchange rate isn’t only important from the point of view of inflation. It is equally important from the aspect of business, investment and consumer confidence, as well as banking sector stability. And we wouldn’t have had an increase in investments or a tripling of exports from 2012 to today without it, and the long-term improving of the external position is ultimately dependent on that.

How possible is it to expect the continued improvement of Serbia’s credit rating under such conditions?

Under such uncertain global conditions, improving the credit rating is rendered quite difficult, primarily due to the exacerbating of macroeconomic trends globally, which reflects on a large number of small and open economies like Serbia’s. By analysing the reports of ratings agencies, first and foremost the latest report of the S&P agency, we concluded that the revising of Serbia’s prospects to obtain investment credit from a rating of positive to stable was initially a result of global factors, primarily the conflict in Ukraine and concerns over its possible impacts on the Serbian economy. On the other hand, the very fact that Serbia’s outlook has been revised to stable, rather than negative, reflects a balanced relationship between risks following the outbreak of the crisis in Ukraine and Serbia’s positive medium-term growth prospects.

It was considered that COVID-19 would have a significant negative impact on inflows of foreign direct investment. What do your statistics show in this regard?

The Coronavirus pandemic didn’t impact significantly on Serbia’s FDI inflows. During the two years of the pandemic – 2020 and 2021 – Serbia attracted FDI of 6.9 billion euros, which is firstly a result of the fact that macroeconomic, financial and fiscal stability were preserved both before and throughout the pandemic. According to our data, FDI inflows of 3.9 billion euros were recorded in 2021, thereby surpassing the previous 2019 record. In comparison to 2020, inflows were up 27.1%, while they were up 1.2% compared to the recordbreaking 2019.

It was back in 2018 that we introduced the first system for instant payments in this region, that was also among the first in the world, and we continuously ensure citizens and businesses have the possibility to use the latest payment solutions and functionalities. And that work never ceases

According to preliminary data, FDI inflows stood at approximately 1.6 billion euros in the first half of this year, and investors continued investing in both new and existing projects. The largest part of FDI entered tradeable sectors, primarily the processing industry, and their geographical distribution was also maintained, which we consider as being crucial for resilience and Serbia’s continued double-digit export growth in the years ahead.

How have rising inflation and the economic slowdown so far reflected on the work and stability of the banking sector?

Regardless of the challenges to date, banking sector stability hasn’t been threatened for an instant. We recognised the potential risks of the pandemic on time and didn’t delay in introducing measures that turned out to be adequate and helped in preserving the creditworthiness of citizens and the economy. We not only succeeded in preventing the worsening of banking sector asset quality, but also in reducing the share of NPLs to the lowest historical level, of 3.29%. The banking sector maintained a high degree of capital adequacy and liquidity, alongside satisfactory levels of profitability. The results achieved to date instil confidence in our banking sector remaining a factor of stability and support for the economy and citizens.

Banks introduced numerous online services during the previous period. However, according to the recommendations presented at the start of the year by the Foreign Investors Council, it seems that plenty of room still exists to further improve and ease the work of the financial sector via the introduction of digitalisation.

We monitor contemporary trends and, in the domain of our legal jurisdiction, trace the path for the efficient and, above all, secure application of new technologies in banking. We have done plenty and continue to do a lot on the digitalisation of financial services, not only through the adopting of modern regulations, but also through numerous activities aimed at further developing payment infrastructure. It was back in 2018 that we introduced the first system for instant payments in this region, that was also among the first in the world, and we continuously ensure citizens and businesses have the possibility to use the latest payment solutions and functionalities. And that work never ceases.

To what extent does the NBS, and the banking sector itself, pay attention to advancing the population’s digital skills and ensuring equal access to services for those lacking digital skills?

The contemporary way the banking sector operates, which implies accelerated digitalisation, inevitably requires that users of financial services possess different skills. We are working actively to inform citizens and raise their awareness of the digital banking services available to them. However, the development of digital and electronic banking only represents a complementary addition to traditional forms of communication and existing banking services. We thus expect banks to preserve those traditional channels in order for all citizens to be able to access and utilise required financial services.